Diversify Your Income Portfolio
When it comes to diversifying one’s portfolio in retirement despite the call for increasing rates, there are several things you can do.
Since bond income has traditionally provided the highest income at a relatively low rate of risk, investors should not be shocked to find that they can expect to roll over their existing bonds at lower rates… which means lower income.
Short of taking on additional risk, there are several things a retired investment can do to diversify their interest rate risk while minimizing the impact to their overall income.
1. Buy annuities.
One of the things and investor can do is invest part of their overall investment portfolio in annuities. While rates are currently fairly low, there are some aggressive programs in place that will allow the investor to enjoy higher than expected income streams at a relatively low cost.
Key considerations for how much to invest will be your normal cash burn rate over the term of the annuity, expected life expectancy (e.g. how old you are) and the level of income the annuity can provide.
2. Buy Dividend Securities.
Although the idea of buying dividend securities is nothing new to most investors, the fact remains that these types of securities remain fairly high risk for most portfolios.
As a result, investors need to determine the best type of dividend securities they should hold — whether they are common equities that pay steady dividends or preferred securities that will be more income focused — before they go and buy any random equity holding.
Because of the heightened risk, investors should take a long and hard look at just how much they are willing to risk for the income these securities will provide.
3. Invest in Short-Term Term Deposits.
Although term deposits normally come with a lower rate and therefore lower income than bonds, their face value will not fluctuate and they will have shorter maturities than most bonds.
This means that investors can park their maturing bond money in shorter-term term deposits while waiting for bond rates and the bond market as a whole to stabilize over the coming years. While this is not an ideal, it does provide a better alternative than a cash equivalent and/or Treasuries.
These are just three things investors can do to reduce the risks and income reductions associated with a maturing bond portfolio. While retirees will often find that these alternatives will result in lower income amounts, they will also be pleased that the risks are often diversified or reduced, at least in the short to mid term.
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